COMPANIES (COMPROMISES, ARRANGEMENTS AND AMALGAMATIONS) AMENDMENT RULES, 2024
Introduction
Ministry of Corporate Affairs vide its notification dated September 9, 2024, notified Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024 (the "Amendment Rules") by amending the Rule 25A of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (the "Principal Rules"). The Amendment Rules came into effect on September 17, 2024, and it intends to provide a fast-track route for inbound cross border reverse merger between a foreign holding company incorporated outside India and an Indian company, being its wholly owned subsidiary company incorporated in India.
Section 233 of the Companies Act, 2013 (the "Act"), provides the fast-track route for approval of merger/amalgamation between following eligible entities :
a) two or more small companies;
b) holding company and wholly owned subsidiary company;
c) two or more start-up companies; or
d) one or more start-up companies with one or more small companies.
Section 234 of the Act read with, rule 25A of the Principal Rules permits merger and amalgamation between a foreign entity of certain jurisdiction with an Indian entity or vice versa on satisfaction of the following conditions:
a) Prior approval of Reserve Bank of India ("RBI") is procured for such cross-border merger/ amalgamation; and
b) Approval of such cross-border merger/amalgamation by NCLT under the provisions of section 230- 232 of the Act.
New Provisions under the Amendment Rules
A new sub-rule 5 has been inserted to rule 25A of the Principal Rules which prescribes conditions for merger/amalgamation of foreign holding company (the "Transferor Company") with its wholly owned Indian subsidiary (the "Transferee Company"). As per the said rule 25A (5) following conditions must be fulfilled for merger/amalgamation of Transferor Company with Transferee Company:
(i) Both the Transferor and the Transferee Company shall obtain prior approval of the RBI,
(ii) The Transferee Company (being the Indian Company) shall comply with the provisions of section 233 of the Act,
(iii) Transferee Company shall be responsible to make an application to the Central Government ("CG") under section 233 of the Act and the provisions of rule 25 of the Principal Rules shall apply to such application, and
(iv) Declaration in form CAA 16, if compromise or an arrangement or merger or demerger between an Indian company and a company or body corporate which has been incorporated in a country which shares land border with India, shall be made at the stage of making application under section 233 of the Act.
Analysis of the Amendment Rules:
The Amendment Rules permits a foreign holding entity to merge/amalgamate with its wholly owned Indian subsidiary company under the fast-track route under section 233 of the Act, wherein the elaborate procedure of merger/amalgamation under section 230-232 of the Act through the NCLT route can be avoided.
With respect to obtaining prior approval of RBI, this condition has always existed under Section 234 of the Act and is not a new requirement for cross border merger/amalgamation. However, prior to the Amendment Rules, under Rule 25A of the Principal Rules only the transferor entity in inbound or outbound cross border merger/amalgamation, as the case may be, was required to obtain the prior approval of the RBI. Under the Amendment Rules, new sub-rule 5 of Rule 25A requires both transferee and transferor to obtain such approval in case of inbound crossborder reverse merger undertaken through fast-track merger route. So, this requirement is a deviation from the earlier regime which required only the transferor entity to obtain prior RBI approval.
The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 ("Cross Border Merger Regulations"), has a concept of 'Deemed Approval', wherein it is expressly provided that any transaction on account of a cross border merger undertaken in accordance with the Cross Border Merger Regulations as required under Rule 25A of the Principal Rules, shall be deemed to have prior approval of the RBI.
Since the Amendment Rules (effective from 17th September, 2024) specifically provides that both the transferor as well as the transferee shall obtain the prior approval of RBI, it ought to be clarified by RBI whether the concept of 'Deemed Approval' under the Cross Border Merger Regulations (which were notified on March 20, 2018) shall also apply to the cross border merger/amalgamation undertaken under fast-track route as permitted by the Amendment Rules.
Conclusion
Permitting fast-track route for a foreign holding entity to merge/amalgamate with its wholly owned Indian subsidiary company reflects governments initiatives to promote ease of doing business in India.
Since the object of the Amendment Rules is to expedite the inbound merger/amalgamation process, it is logical that the concept of 'Deemed Approval' should also be applicable to the cross border merger/amalgamation undertaken under fast-track route. However, in view of the fact that the prior approval of RBI is required to be obtained by both the transferor and the transferee company under the Amendment Rules (which is a deviation from the requirement of prior RBI approval under Section 234), RBI ought to clarify whether concept of 'Deemed Approval' would be applicable or not.
Further, the Amendment Rules are only applicable for inbound merger and not the outbound merger i.e. where Indian entity merging with foreign entity and resulting company is a foreign entity. In case of outbound mergers, the process under section 234 and 230-232 shall be followed.
Another, important aspect to consider is the use of word "shall" in Rule 25(5)(ii) under the Amendment Rules. As per the Amendment Rules, the Transferee Company shall comply with the provisions of Section 233, which indicates that in case of merger/amalgamation of foreign entity with its wholly owned Indian subsidiary company, the Transferee Company is mandated to comply with the provisions of Section 233 to undertake the process under the fast-track route. It is interesting to note that Section 233 (1) uses the word 'may' wherein it provides that certain eligible companies may enter into a scheme or amalgamation or merger subject to the provisions stated in Section 233. Further, Section 233(14) of the Act which gives an option to use the provisions of Section 232 of the Act for approval of the scheme of merger/amalgamation from NCLT. Therefore, the Amendment Rules contradicts with these provisions of Section 233 of the Act. The interpretation of 'shall' under Rule 25(5)(ii) of the Amendment Rules will need to be settled by a court/tribunal of competent jurisdiction or MCA will have to clarify this by subsequent notification.
White label ATMS | Regulatory Restrictions on M&A deals [This is Part 2 of the article series on the regulatory developments pertaining to the business of white label ATM operations in India]
In Part 1 of the series, we examined the different incentives offered by the Reserve Bank of India (RBI) to White Label Automatic Teller Machine Operators (WLA Operators) to bridge the existing gap in banking accessibility, and to enhance banking experience, in semi-urban and rural regions of India. In addition to the existing four WLA Operators, recently, Electronic Payment and Services has become the fifth WLA Operator in India, marking the first such RBI approval in the past decade. In Part 2 of the series, we now analyse the M&A implications in this sector. RBI Prior Approval: On July 4, 2022, the RBI, vide a notification (Notification), issued directions mandating the WLA Operators to obtain prior approval in the following cases, in the following manner:
(a) Takeover / acquisition of control by a non-bank WLA Operator, which may or may not result in change in management of the transferor non-bank WLA Operator – The transferor WLA Operator (being a non-bank payment system operator under the Payment and Settlement Systems Act, 2007 (PSS Act)) is required to submit an application to the Department of Payment and Settlement Systems, Central Office, RBI, (DPSS) with necessary details pertaining to the proposed new directors and new shareholders (in the manner set out under the Notification);
(b) Sale / transfer of the payment activity to an entity not authorised to undertake similar activity i.e., sale of WLA business to a non-licensed entity (entities other than authorised payment system operators) – The seller / transferor WLA Operator is required to voluntarily surrender its authorisation in the manner prescribed by the RBI under its circular dated May 12, 2016, and submit an application to DPSS for prior approval. Simultaneously, the buyer / transferee non-bank entity intending to take over the WLA Operator's business is required to apply for authorisation in accordance with the procedure set out under the Payment and Settlement Systems Regulations, 2008, along with requisite application fee, as a condition precedent to the proposed sale/transfer; and such application would be akin to obtaining a new authorisation under the PSS Act. Additionally, such buyer / transferee is also required to comply with any regulatory / supervisory action taken by RBI for the time period prior to the proposed sale / transfer. The RBI shall endeavour to respond to the applications within 45 days of receipt of complete details from both the parties. In the event that such sale is to an entity authorised by the RBI to undertake similar activity i.e., the buyer entity already possesses a valid authorisation from RBI to operate as a WLA Operator, then, while the parties are required to comply with the abovesaid procedure, however, they are exempted from seeking prior RBI approval. Although the Notification does not clearly specify which entity would be required to surrender its authorisation in cases of takeover/ change in control due to share acquisitions, following the principle laid out by RBI under the Notification, only one authorisation will be permitted to subsist.
Public Notice: The Notification also mandates the requirement of a prior public notice. A public notice, either separately or jointly, by the authorised non-bank WLA Operator and the buyer / acquirer bank or non-bank entity, is required to be given at least 15 days prior to effecting any changes. Such public notice is required to be published in at least one leading national and one local vernacular newspaper and should indicate the particulars of the entities involved and their intention and reasons for such change. In addition to the said public notice, the seller would also be required to inform all the stakeholders including agents, bankers, customers, merchants of the changes at least 15 days prior to effecting any such change.
Exemption: The Notification exempts events of change in management or directors of non-bank WLA Operators from the requirement of obtaining prior RBI approval, where there is no takeover/acquisition of control, and prescribes that the transferor non-bank WLA Operator would only be required to inform / intimate the DPSS within 15 days of such change. The RBI will examine the fit and proper status of the proposed new management/ directors and place suitable restrictions (if deemed necessary). This is in contrast with the 15-day prior public notice and intimation to be given to all stakeholders and creates a situation where the stakeholders are being informed before the regulator.
In view of the foregoing, while the recent amendment made to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, of inserting a specific entry for 100% foreign investments under automatic route in WLA operations is a welcome move, and has removed one level of scrutiny, however, the Notification specifies regulatory obligations to be complied by the parties in transactions involving transfer of WLA businesses. The 15-day prior intimation requirement to be given to all stakeholders, complete disclosure of details of the proposed new shareholders (including particulars in respect of beneficial ownership of foreign investors), manner in which the new investors intend to recover their investments made, and sources of funds of the proposed new shareholders, essentially ensure that this licensed sector remains firmly under the purview of RBI, the regulator.
Moving forward, the transactions concerning the acquisition / takeover of WLA Operator's businesses requires a more strategic approach and enhanced risk assessment. The Notification, and its underlying timelines, could impact cross-border transactions on a global level where the regulatory restriction in India will have to be appropriately considered for the Indian leg of global transactions. Additionally, given that the RBI approval is a preclosing action item, which may result in a longer interim period between signing and closing, appropriate standstill obligations, covenants, warranties and indemnities should be factored in the transaction documents. Since the Notification clarifies that both the buyer and seller entities cannot hold the authorisation to operate as a WLA Operator, the surrender of either the seller's authorisation or the buyer's authorisation (in cases where both hold such authorisation and there is only an intimation requirement for the transaction) may also have to be brought to the attention of the regulator despite it being a post-closing intimation requirement. Overall, obtaining RBI approval becomes a key pre-closing condition in sectoral transactions concerning WLA business, and investors will be subject to regulatory checks (under PSS Act) during both their entry into, and exit from, the WLA business sector.
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